Ben Horowitz Explains Why Silicon Valley Is Banking On Bitcoin

Bitcoin is an untraceable, all-digital form of money with no government regulation, probably best known as the crypto-currency used to buy illegal drugs on the underground website Silk Road. But it's inching its way toward legitimacy, with major retailers and services like Overstock and Dish Networks now accepting bitcoin payments.

In the latest incremental win, Apple recently updated its App Store guidelines to clarify its position on bitcoin apps. Apple will now allow the sale of apps enabling transmission of "approved virtual currencies," as long as they are legal under state or federal law in the areas the app functions.

Silicon Valley has made significant bets that bitcoin will transform digital trade. Not many people are good at explaining why. But I recently sat down with Ben Horowitz, a partner in venture capital firm Andreessen Horowitz and the author of the new book The Hard Thing About Hard Things, who offered the clearest description I've heard to date of why he and others are investing deeply in companies connected to bitcoin.

The key innovation is that it solves what's known as the "double spending problem," says Horowitz, whose firm has invested $25 million in Coinbase, a digital wallet that enables buying, storing, and spending bitcoin.

"If you give me the coin, I know that you gave it to me and nobody else," says Horowitz. "Traditionally, we have someone like Visa who keeps a ledger, and you have to pay a big fee....in bitcoin there is no central thing or fee."

Watch the video above for more details from Horowitz on why bitcoin isn't a "fake currency" or a fad—and why Pawn Star personalities should probably take a pass on any more financial commentary.

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Please. This arrogant guy is wrapped up in tech-talk and completely misses the biggest risk of Bitcoin – that its supply, by definition, is limited.

Think about what that means: it means, like gold or like fine art, it will always be susceptible to wild fluctuations based on popularity. Its role as a investment will thus always trump its role as a currency. All you need do is look at the price fluctuations since its inception to prove this.

And yet the bitcoin advocates insist that the volatility will calm down after it matures. Bull. This is not software, this is a fixed-quantity bet. Like seashore, they aren't making any more of it, hence it will always be attractive to speculators, hence it will be useless as a currency.

The designers, perhaps influenced by fuzzy right-wing monetarist 'thinkers,' believe that a fixed amount of currency is a desirable feature. It's not, it's a horrible bug.

You're right, it will stay volatile, at least until it becomes adopted worlwide as the global reserve currency. At which point it will become the standard for monetary exchange, effectively replacing gold or the USD in that function. Bitcoin is very different from gold. It is much MORE divisible and unlike gold its digital property allows it to be sent anywhere in the world instantly. Speculators will remain but at one point they will be a drop into the ocean of people that use Bitcoin. Market liquidity will fix the volatility problem once it becomes large enough.

And what you're missing is the fact that price fluctuations don't matter if you plan on using the technology as a means of wealth transfer. Buyer can convert to bitcoin, send bitcoin to seller, then seller can convert to fiat, all done behind the scenes, without any risk of price changes. Furthermore, Bitcoin is currently inflating at 11% annually, and supply will increase for more than 120 years. Additionally, if it turns out the the currency needs a constant supply increase, say 3% annually, then that can easily be built into the algorithm by majority consensus. Or, inflation could be determined by algorithm based on economic indicators. This is a programmable economy, you can do whatever the hell you want.

First sentence: “Bitcoin is an untraceable all-digital form of money...”

Bitcoin is completely traceable. It's a public ledger, that everyone can see. You can confirm which transactions have occurred when and between which addresses. Mixing services exist to try and disrupt this traceability.

The transactions are traceable to each other, but not to individuals. But more importantly, transactions cannot be stopped, and wealth cannot be confiscated, even if it is known which address belongs to an individual.